Telecom Plus eyes lower FY27 profit, cuts dividend despite record FY26 results

Telecom Plus reported FY adjusted pre-tax profit of £132.2 million, up 4.7% year over year, with revenue rising 5.6% to £1.94 billion and customer numbers increasing to 1.43 million. However, the company warned that adjusted profit before tax for the year ending 2027 will be "meaningfully lower" as it launches a five-year investment plan, and it cut the final dividend to 12p from 57p, reducing the total dividend 46.8% to 50p. The outlook implies temporarily higher leverage of about 1.5x net debt/EBITDA and rising bad debt pressure, partially offset by £40 million in buybacks and a long-term target of £175 million adjusted profit before tax by 2031.

Analysis

This reads less like a simple payout reset and more like a deliberate re-rating of capital allocation: management is choosing to trade current cash yield for a longer-duration growth asset. The market will likely focus on the dividend cut, but the more important signal is leverage moving up while the mix shifts toward recurring multiservice revenue, which should lower volatility only if customer acquisition and cross-sell stay on plan. That makes the next 12-18 months a credibility test, not a pure earnings story.

The weak point is not headline growth, but the quality of growth. Higher bad debt and rising churn suggest the consumer cohort being added is more price-sensitive and more exposed to any further deterioration in real household income; that creates a lagged risk that margins compress before the enlarged customer base fully monetizes. Competitively, fixed-price undercutting in energy can force the company to defend share with lower gross profit per account, which is a poor setup when leverage is temporarily higher.

The contrarian angle is that the market may be over-penalizing the dividend reduction relative to the underlying optionality. If the company can execute even moderately well, the combination of buybacks, a higher recurring mix, and implied long-term ROCE above 30% could justify a higher multiple than a utility-style cash yield stock. The real inflection point is not the current year; it is whether multi-service penetration accelerates over the next 2-3 reporting cycles without another step-up in credit losses.

For portfolio construction, the cleanest expression is to treat this as a balance-sheet-carry-and-execution trade rather than an income name. The upside case is a slow grind higher as the plan de-risks; the downside case is a value trap where leverage rises just as churn and arrears worsen. That asymmetry argues for patience on entry and tight monitoring of customer retention and bad-debt trajectory.

Key Decisions for Investors

• Avoid chasing the stock immediately after the dividend reset; wait 1-2 quarters for evidence that organic multiservice growth is offsetting higher churn and bad debt before building a long.
• If long, size as a 12-18 month execution bet with a stop on any two consecutive quarters of deteriorating customer quality metrics; reward is multiple expansion if the market believes the FY31 plan is achievable.
• Use a pairs structure: long TEP / short a higher-bad-debt, slower-growth consumer credit-sensitive utility or telecom peer to isolate execution alpha from macro household stress.
• Sell downside protection via puts only after the next trading update confirms credit losses are stabilizing; until then, elevated leverage and customer-quality risk make short-vol unattractive.
• For income mandates, replace TEP with a more stable payout name rather than trying to own it for yield; the current distribution is now more dependent on continued buybacks and plan delivery than on cash-flow conservatism.